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» Report 2008
Chapter 3 - Regarding supply
Distribution is the strategic area for the entire cinema sector. The cinema industry market is, in fact, a highly intermediated market and the companies which produce films do not have consumers as clients, but rather, other companies which take the responsibility of delivering the product to its final user. Such a structure results from the first, great phase of cinema development, when the unique outlet channel was represented, in every nation, by the thousands of local cinemas across the country and where a distributive, logistic network was formed for the rental of newly released motion pictures or those of a second or third showing following a first showing in the more important cinemas.

Elaboration from source: “Il cinema italiano in numeri” (from 1999 to 2005) edited by Ufficio Studi Anica. * The total of foreign first releases for the years 2004 – 2005 does not include films produced outside of European Union apart from those of the United States.

As a catalyst this situation resulted in a very restricted number of distribution companies, thereby progressively reinforcing their negotiating power against both the purchasers both at the top of the industry and the traders at the bottom. A remarkably powerful position which the great producers of Hollywood intercepted immediately absorbing the principle distributors into the United States and becoming directly responsible for the diffusion of their films and then exporting this commercialization model onto their own external market references, starting with Europe.
As a result of this, at first glance, the analysis of the sector demonstrates a marked hourglass shaped conformity. In the upper parts thousands of production companies (70.6% of the entire sector) are tens of thousands of staff members and direct collaborators (80% of the global employment); in the lower parts are situated businesses – equal to 20.1% of all registered company titles – with the other relevant portion of personnel (14.1%) being sectorial. In the centre, the hourglass funnel, are found the relatively few distribution structures, through which pass, similar to grains of sand, the motion pictures which their creators, the film makers, must show to the public..27
This is the cinema sector which materially manages the flow of capital resulting from public consumer spending which arrives, through successive and gradual repartitions, at the top of all the film industry systems and sectors. It is, above all, a result of this capacity as monetary collectors that certain settlements were agreed on – few, in reality and so far only partial – having the current conformity as a consequence.
The first of these settlements originates in the period when television began to constitute an interesting supplementary source of revenue in comparison with the prior exclusive source of local cinema screenings. At a certain point transmission rights covered a proceeds quota varying between 30% and 35% and production companies began to offer opposing parties direct to the television broadcasters in order to avoid the relegation of the relative commissions to the distributors. Then, also under the encouragement of licensing laws which had obligated them to directly make and schedule a determinate number of national productions, the same television networks (Rai and Mediaset) came directly into operation catalyzing, in short, resources and activity at the level of the major foreign companies and, thereby, paving the way for already well-known companies like Filmauro and Eagle Pictures.

Elaborated from data source “Il cinema italiana in numeri” (2006 – 2008) edited by Ufficio Studi/Ced Anica.

In the end, home video channels were strongly developed, channels which only partly affected the volume of takings of the primary channels, but, nevertheless, did undermine the income from television, progressively reducing it to 15%, and, in this phase, the producers understood that they could manage the distribution in certain specific sectors themselves, above all that of the new formations resulting from the innovative technological developments which had transformed the world of communication.
The opportunity of new economic advantages, therefore, induced other independent production companies to provide themselves with real operative divisions for distribution and this sector is now beginning to present a host of operators – at least for the alternative diffusion to screening circuits – more varied than in the past. 28 (cf. table 15).

Elaborated on Cinetel data from “Il cinema italiano in numeri” (2007 – 2008) edited by Ufficio studi/CED.

The market leadership exercised through their vertically integrated European branches by large Hollywood groups still has results today, results which are clearly preponderant in terms of cinema takings. Over time they have selected the number of films entirely admitted onto the market every year, and as far as the launch of new releases is concerned, their influence appears, also today, of indubitable importance. In five they maintain a constant productivity quota of 50% The other four major Italian operators (if Eagle Pictures is included) can attest, on their part, to 40%, demonstrating themselves, therefore, to be among the most equipped within the European Union: of the first ten largest continental volumes of trade Medusa is in fourth place, 01 Distribution in sixth place and Eagle Pictures seventh. The remaining positions are occupied by an alternating group of another 20 independent, national production-distribution companies.29

Elaborated from data of Cinetel by “Il cinema italiano in numeri” year 2007 and 2008 edited by Ufficio studi/CED Anica.

The idea that the American cinema product has diverse characteristics from that of European or Italian cinema is persistent. Keeping with the results is the deduction that, in effect, United States cinema manages to more efficiently intercept the average preferences of the public. Of the 20 films which, in Europe, had the largest number of spectators, 18 were, for instance, American productions and even the European “Mr.Bean’s Holiday” positioned in seventh place with 15.2 million cinema viewers, involved U.S. participation, whereas the French-English-Czech production “Le Mome” remained relegated to the penultimate position.30
It is, in reality, certain that the United States product, having vast available resources, bases itself on a diverse ‘star system’ adopting play scripts which represent authentic best-sellers and is, undoubtedly, promoted much more effectively. Marketing investment by major US companies is practically incomparable with that of European production and is often greater than the same budget assigned to production, in a ratio which, with Italy, can be measured, for example, in tens of millions of euros against – at most – a handful of millions (however, the figures stop at five zeros much more often).31
On the other hand, it is clearly apparent, amongst those working in the sector, that films distributed on a national scale which do not ‘survive’ the first weekend of screening – in the sense that they fail to meet even the lowest of expected earnings – are definitely ‘lost’ as far as the circuits of local cinemas are concerned and are duly rejected immediately.
As a result of the latest settlements within the sector and the strategy adjustments, national cinema has demonstrated an ability to better interpret and apply the manufacture of so-called blockbuster films, as indicated by the fact that in the last eight years, the absolute box office hits have been national titles (the unique exception being ‘The Da Vinci Code’ of Sony in 2006 which interrupted a series of four “cinepanettoni” (comical Italian Christmas films) of Filmauro) as seen in table 17 below.

Source: “Il cinema italiano in numeri” (2001 – 2008) edited by Ufficio studi Anica.

The fact is that despite generating proceeds greatly inferior to home video channels, the film industry conserves its indisputable primacy, what remains for now indispensable. The first link in the distribution chain is, in fact, a determining factor for the formation of commercial values of the film throughout its life cycle, given that success in local cinemas creates the first clear credential of a film which, due to the public, conditions its possibilities on all of the successive diffusion channels. It is, above all, in this light that both the aggressive policies on international markets and the resolved defence of their own advantageous position by the major production companies, in support of which they have more recently started investing more assiduously in productions abroad giving a domestic flavour to productions of which they are the first and major investors (as is the case with the Harry Potter saga and of the James Bond 007 series, one stamped UK and the other NWZ, or rather, New Zealand).


The distributive system as takings collector from the various channels is at the centre of the process of subdividing the resources generated by market demand. The standard procedures for division follow innumerable modulations according to the various diffusion channels, but in general – as far as the business of first showings is concerned, and where SIAE registrations prevail, just as with the royalties obtained from the same SIAE, these procedures model themselves on two principle systems, depending on the initial relationship between producer and distributor.
  1. Fixed fee or flat fee licence. The production companies, not assuming the risk of either success or failure of their films, ceded the exploitation rights – usually before initiating the manufacture of the film – to the distribution company in exchange for a fixed amount (licence) that can be budgeted in three diverse forms: full industrial costs, covering the artistic costs and technical production costs attributable to the film; full company costs, including a cover charge for the general expenses and financial interests on the investment; cost plus with the addition of a predetermined profit in absolute value.
  2. Gross Margin Percentage. The producer assumes the company risk. Nevertheless, the producer can choose whether to divide the eventual earnings (i.e. the gross margin) with the distributor or not. If the distributor is completely assumed – once the rental licence has been transferred to the film exhibitors – they are charged only with their expenses and commissions; in cases of condivision the distributors credit that part of the proceeds corresponding to their quota of invested capital. Normally, distribution companies find no advantage in holding less than 50% within a partnership, this is because the distribution company commission generally corresponds to 30% of the gross margin and promotion costs, publicity and the physical circulation of the film which has to maintain what amounts to an average of 20% of the same gross margin.32
A recent production of which the economic coordinates of costs and takings are well known as well as the terms of the relationship between industrial and investment partners, may serve as an example. The production of ‘Gomorra’ (English version ‘Gomorrah’) cost 4.55 million euros. The production company Fandango, along with 01 Distribution of Rai Cinema, 2.55 million euros, integrating the remaining 2 million with an FUS state contribution in interest account (meaning under the form of loans to be reimbursed). At the box office ‘Gomorrah’ took 10.2 million euros, which, for Fandango and its partner 01 Distribution, generated 3.05 million, once the financial commissions had been deducted, along with compensation for the same 01 for distribution. The investment also respected the rules which the international entertainment industry conforms to: equalling, at least, the domestic market income, later followed by further proceeds as the entertainment product is exported. This also explains why it is not possible to obtain from the official financial statements of the companies – thereby knowing the true assets of the sector and its market – any indication of the real business activity carried out and, above all, in which operational area (whether in participation or not, and eventually, to what degree). Furthermore, it explains how every eventual consideration of the box office results, of the economic returns of a specific title, burdening the companies which are its potential recipients, always end up rather uncertain, slightly suspended in the void.  Despite the fact that the success and the cinema takings, which are more or less in the millions, of the cinemas are assumed with standard interest of the film and they condition the exploitation, for the rest of their life cycle, on other consumer platforms.
  In the costs and proceeds trends taken from the company reports the general, managerial and financial equilibrium is reflected of a film industry business which is also the product of the collective comparison, thanks to the public, of produced and distributed films; however, there is no direct reflection of the genuine economic results that every individual film generates.
  In comparison to the overall takings generated by local cinemas, in general, that specific operational division is assigned to distribution companies a value of production – consistent with the exercised rights of exploitation, a net of the eventual promotion costs met and of the commissions of the traders – including between 20% and 30%. Against the total earnings of local cinemas of 593.7 million euros, according to the sample report of Cinetel , and of 669.3 million euros collected by SIAE, the net proceeds obtained by distribution companies for their characteristic activity within the primary channels of local cinemas can be placed, therefore, within the range of 120-178 and 133-200 million euros per year. To this figure, furthermore, can be added the value of secondary channels, which together are three times superior,  a quantity which varies according to the various segments and the relative, contractual parameters of use.

27 The technical Italian term ‘cineasta’ (most readily rendered in English as ‘film maker’) is based on the definition given by cinema theorist and critic Louis Delluc.
28 There are also those who use the typical technique of ‘guerrilla marketing’ in order to ensure the possibility of producing a film and for organizing the distribution of that film for screening (in film circles this is defined as self-production). Tickets are received on the basis of the project, in a type of ‘popular shareholding’ whose value is constituted by the quota of participation in investment and the rights of first screening. Certain examples include “Tu devi essere il lupo”, “Il vangelo secondo Precario” and “L’estate del mio primo bacio”.
29 “Les enterprises del distribution cinématographie en Europe” edited by the Oservatoire européen de l’audiovisuel. Strasbourg 2007.
30 “La frequentation des salles de cinema dans lrd vengt-sept Etats del l’union européen – 2007” edited by the European Audiovisual Observatory, (Strasbourg, May 2006).
31 On the different base assets of the cinema systems in the United States and Europe direct reference is made to the study “Europa-Stati Uniti: differenze strutturali e manageriali – Il settore cinematografico negli Stati Uniti e nell’Unione Europea” by Fabrizio Perretti and Giacomo Negro, professor at the Bocconi University of Milan (March 1999).
32 The value system within the cinema sector is the subject of a profound analysis in “Il cinema e la misurazione della performance” by Giovanni Tomasi (edition Egea, Milan 2004) to which reference was made for the brief expository description.


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